U.S. Produces the Most Oil since January 1997

Crude prices declined despite another drop in crude inventories because of rising problems in Europe and the highest production in the U.S. since January 1997. The U.S. produced 6.509 mbpd in the week ended Sept 21st, a gain of +3.7%. If this trend continues for the rest of 2012 it will be the highest level of sufficiency since 1991. Imports have declined -3.2% over the same period last year.

Shale drilling in Texas, North Dakota and Oklahoma contributed to the gains. New shale plays across the country could push U.S. production to 8.0 mbpd by 2017. JP Morgan thinks this rising production coupled with the increased production by Saudi Arabia and friends will push crude prices lower over the next six to nine months according to their comments at a London conference on Tuesday.

Citigroup said the increasing oil and gas supplies could lead to a reindustrialization of America that could add 3.6 million jobs by 2020. Mitt Romney said he would authorize the Keystone pipeline the first day in office and remove regulations prohibiting or slowing drilling in the first 100 days. The government is holding back private industry as the president pushes his green energy policy favored by his large contributors.

Crude oil declined again to close at $90 but it may have farther to fall. Support is $88 and production is booming.

Crude prices also fell because of increasing worry over Spain. The Bank of Spain said today that the economy was shrinking at a "significant" pace. Demonstrations protesting austerity continued and also returned to Greece. Germany, the Netherlands and Finland made statements saying there would be no banking union and weak banks must get help from the ESM rather than looking to the EU for a bailout. That put the idea that Europe was moving closer to solving their problems on the back burner and not likely to happen for many months.

Spain is expected to release its budget and economic projections on Thursday and the outlook is not good. Greece is expected to get a negative report by the Troika in the coming weeks and its future in the eurozone is back in question.

China's economy continues to slip lower with each new economic report. The combination of all these factors should keep the pressure on oil prices despite QE3 likely to push the dollar lower.

Crude inventories fell -2.4 million barrels for the week ended Sept 21st. Analysts were expecting a +1.9 million barrel gain. The decline came as a result of a sharp drop in imports. Imports declined from 9.85 mbpd to 7.60 mbpd a total of almost 16 million barrels for the week. That is the largest weekly decline since July 1998. That is a MONSTER decline and the fact total crude inventories only fell -2.4 million barrels is amazing.

The sharp decline in imports has to be related to timing of deliveries plus the prior week was abnormally high thanks to a catch up week where tankers were waiting out of the path of Hurricane Isaac. I expect the imports numbers will be back in the 8.2 mbpd range next week as normal deliveries resume.

Inventory Snapshot

Crude oil levels are likely to rise next week because demand for refined products is falling. The demand for distillates (diesel, jet fuel and heating oil) fell -10% using the four week average the prior week. The production in Texas is approaching an 18 year high. Texas production is up +500,000 bpd in the last 12 months and should reach 2.0 mbpd by year end.

Crude Oil Inventory Chart

Gasoline inventories declined -500,000 barrels and continue to shrink compared to the five year average range. Gasoline prices at retail declined -2 cents to $3.81 but we need to see a 20-25 cent decline to make any difference. We are still at risk of a release from the SPR as a move to help the economy and the president's reelection chances.

Gasoline Inventory Chart

Distillate inventories also declined by -500,000 barrels and like gasoline they are trending to the lower end of the five year range. This will support diesel prices and homeowners that heat with oil are going to be struggling to pay the bill to fill their tanks.

Distillate Inventory Chart

Gasoline prices rose again after an explosion at a refinery in Saint Johns, New Brunswick. The Irving Oil refinery later said it restarted normal operations but that data did not immediately impact prices. An explosion is big news but a restart generates no headlines.

Gasoline inventories in the Northeast have fallen to the lowest level since the EIA records began in November 1990 due to refinery closures. The supply chain has not yet compensated for the permanent decline in production.

Gasoline prices have been very resilient thanks to the continuing refinery outage in California and the shutdowns as a result of Isaac. Demand will continue to weaken over the next couple weeks and prices should eventually decline through this seasonal weakness.

Saudi Arabia and friends are increasing production in an effort to push Brent prices down to $100 in order to keep the pressure on Iran. As long as prices remain in that range the price of gasoline will decline and the U.S. will have no reason to weaken the sanctions on Iran. Iraq is slowly increasing production and they don't have an OPEC quota. They are producing at the highest level in ten years and are now producing more than Iran.

In a weak global economy all of these factors suggest oil and gasoline prices will go lower. However, once the economy begins to heat up we could see demand increase by 2.0 mbpd within a year and all these production increases will immediately be consumed.

Oil prices tend to overshoot when in correction mode and then overshoot in rally mode. WTI closed at $90 and support is $88 followed by $85. If Saudi Arabia and friends are able to push Brent to $100, currently $110 that would probably lower WTI to the $80-$85 range. Personally I doubt they will be able to pressure Brent to those levels as we head into the winter heating oil season. The next four weeks should see prices decline but then begin to rebound in late October.

My initial target for WTI was $88 and the low today was $88.95. One more good dip should attract the bargain hunters but that does not mean the decline is over. I would be patient about catching the falling knife.